BUDGET 2010
Analysing the Parikh
Committee Report on Pricing
of Petroleum Products
Surya P Sethi
The Parikh Committee’s
recommendations on pricing of
petroleum products are bad for
the country and worse for the
aam aadmi. The committee’s
recommendations do not address
the problems of petroleum pricing
in their entirety and appear to be
driven by the desire to give
private sector refiners, originally
set up for export of products, an
entry into the domestic market
under the garb of liberalising
price of petrol and diesel. The
petroleum sector in India needs
tax rationalisation and not tax
increases. The high incidence of
taxes on the petroleum sector,
relative to the gross domestic
product, has a negative impact on
issues such as access to energy
services and development.
Surya P Sethi (spsethi09@yahoo.com) was
formerly Principal Adviser (Energy), Planning
Commission and member-secretary of the
committee that produced the Integrated
Energy Policy Report 2006.
56
S
ince the release of the 2006 Inte-
grated Energy Policy (IEP), three
committees have been set up to look
at pricing of the four sensitive products
namely, petrol, diesel, kerosene and liq-
uiefied petroleum gas (LPG). None of these
reports deal comprehensively with the
distortions that plague not only the oil
sector but the entire energy sector. None
of these reports deal with the issue of
taxes/levies imposed on the petroleum
sector. None of these reports look at how
unmet demand and lack of access to mod-
ern commercial energy have an impact on
inclusive development, and its core com-
ponents such as gender equality, health,
education, infant and maternal mortality
and livelihoods. Greater access to com-
mercial energy remains essential to each
of the foregoing elements of inclusive
development and an improved Human
Development Index (HDI).
Despite a period of high sustained gross
domestic product (GDP) growth, India’s HDI
has slipped eight notches to 134 among 180
countries. Any reform in pricing energy or
petroleum products must necessarily ad-
dress taxation of petroleum products and
the need to raise access.
In different ways all these three com-
mittees propose to free up pricing of pet-
rol and diesel and to gradually reduce sub-
sidies on kerosene and LPG. This note will
demonstrate that the entire basis for this
age-old recommendation is questionable.
This recommendation stems from the
basic inability of these committees to con-
ceive of an effective scheme for targeting
subsidies and not from demonstrating the
absence of a need for such subsidies. Let
me ask if free pricing of these four petro-
leum products will help solve the issues of
access. About 500 million Indians are living
without electricity, about 700 million are
dependent upon biomass as their sole or
primary energy source for cooking and
march 27, 2010
about 400 million are living in poverty.
We have effectively priced and taxed
modern commercial energy outside the
reach of this segment of our society. How
is freeing prices and reducing subsidies
going to help these unfortunate Indians?
And if market-based pricing is such a good
idea within India’s energy context, then
why not allow electricity, coal and natural
gas prices also to be freed and determined
through markets?
India is an energy deficient country.
Per capita commercial energy consump-
tion in India is under 5% that of the US,
under 26% that of China and under 22%
of the world average. I support reforms
and well regulated competitive markets
operating on a truly level playing field.
The question is whether India’s energy
sector or the petroleum sector is suffi-
ciently mature with a healthy supply-
demand balance to deliver such markets.
Reforms, in the Indian context, should
ensure lifeline levels of access to modern
commercial energy for all irrespective of
their capacity to pay. This core and bold
recommendation of the IEP is ignored by
all the three subsequent committees on
pricing petroleum products.
What Are Under-recoveries?
Several arguments of the Parikh Commit-
tee revolve around the issue of rising
“under-recoveries”. It is important to
understand that under-recoveries are not
losses. They are the difference between
the actual price realised and a notional
price called the import parity or trade
parity price (incorrectly, I might add) that
includes custom duties and still has some
elements of the old Administered Price
Mechanism (APM) such as freight pooling,
ocean loss and other provisions relevant
to the actual import of products. Trade
parity price if correctly applied can only
be the export realisation for all products
with net export on balance. Such a compu-
tation entailing removal of notional (not
actual) costs and taxes, and correction for
the quality of the end product would sub-
stantially lower the incorrectly estimated
(“claimed”) under-recoveries. Suffice it to
say that despite huge “claimed” under-
recoveries that are only partially funded
by government of India; no oil company
showed a loss till 2008-09. Technically,
vol xlv no 13 EPW Economic & Political Weekly
 BUDGET 2010

the National Thermal Power Corporation companies absorb a signifi- Table 3: How Subsidies and Under-recoveries Were Funded (Rs crore)
(NTPC) or Coal India could also claim cant share of the under-re- Item 2006-07 2007-08 2008-09

under-recoveries against the price of freely coveries. The Parikh Com- Oil bonds 24,121 35,290 71,292

traded power or freely traded coal. mittee, however, wants the Fiscal subsidies 2,524 2,641 2,688
Under-recoveries absorbed upstream 20,507 25,708 32,000
up-stream public sector com-
Under-recoveries absorbed downstream 4,759 16,125 0
Are the Four Products Subsidised? panies to pay even more.
Total 51,911 79,764 1,05,980
It is my contention that there are no net To justify its key recom- Actual price of crude imports $/barrel 59.2 76.2 79.1
subsidies in the petroleum sector even in- mendations of freeing pet- Reference price (Indian crude basket) $/barrel 62.5 79.5 82.7
clusive of the erroneous “claimed” under- rol and diesel prices and re- Source: Petroleum Planning and Analysis Cell.
recoveries. Contrary to the tenor of the ducing subsidies on kero- Table 4: Comparative Current Prices of Diesel and Petrol (US$/Litre)
Parikh Committee report, the total tax sene and LPG; the commit- Country Diesel Petrol
collected from the petroleum sector by the tee raises the spectre of ever Base Taxes Total Base Taxes Total
Price PPP Price Price PPP Price
central and state governments is a multi- increasing under-recoveries US 0.63 0.12 0.75 0.61 0.11 0.72
ple of the combined fiscal subsidies and based on the peak prices Japan 0.75 0.36 1.11 0.71 0.60 1.31
the claimed under-recoveries. So any price achieved by crude oil in the United Kingdom 0.64 0.76 1.40 0.62 0.95 1.57
liberalisation must also address oil sector recent past. Table 3 high- Germany 0.70 0.97 1.67 0.69 0.98 1.67
taxation. The Parikh Committee fails to lights the fact that average India 0.54 0.67 1.21 0.51 1.52 2.03
even highlight this issue. prices paid for imported 1is US$ = Rs 45.5. The Indian petrol and diesel are of lower quality but no correction
made for this.
Table 1 gives the total take of the state crude on a year to year basis PPP calculation based on IMF factors.
Source: Base Data from Petroleum Planning and Analysis Cell.
and central governments from the oil have been within a far more
sector. Table 2 gives the fiscal subsidies reasonable range. In fact, in real terms Chinese data for July 2009 shows that
and the claimed under-recoveries for the average import prices in recent years have diesel and petrol was sold at $0.82/litre in
same years. The state and central taxes/ been lower than crude prices in the early nominal terms. If one removes the price of
levies alone exceed the fiscal subsidies 1980s. Importantly, the Committee does not diesel and petrol prevailing in the interna-
and the “claimed” under-recoveries by far. question the basis of estimating the erro- tional market in July 2009 and ascribes
Table 1: Taxes and Other Government Receipts from neous “claimed” under-recoveries. the entire balance to taxes, it is seen that
Petroleum Sector (Rs crore) in PPP terms China, at most, taxed diesel
2006-07 2007-08 2008-09 Do Indians Pay Less and petrol at $0.70 and $0.66 respectively
State for Petrol and Diesel?
Sales tax 53,949 56,445 63,349
to yield an effective price of $1.13 and $1.11
Other levies 6,006 7,000 4,937 This is yet another myth that permeates the per litre for diesel and petrol respectively.
Sub total 59,955 63,445 68,286 Parikh Committee and indeed most govern- It is worth noting that this simple exercise
Centre ment discourse. Petrol and diesel prices are overestimates the tax component and
Custom duty 10,043 12,626 6,299 made up of the base price for the fuel and hence the total effective price in China be-
Excise duty 58,821 61,685 60,875 the taxes/levies imposed by the central cause the base price is typically higher
Other levies 8,284 10,010 9,803
and the state governments. I agree with the than the traded international price for
Sub total 77,148 84,321 76,977
Parikh Committee that the international bulk petrol and diesel. What is clear,
Total taxes/levies collected 1,37,103 1,47,766 1,45,263
price of a traded commodity such as oil and nevertheless, is that while China taxes
Total government receipts 1,57,219 1,71,731 1,61,798
Source: Petroleum Planning and Analysis Cell. oil products should prevail. My problem is diesel, at most, at about the same level as
that the committee completely ignores the India, China’s taxes on petrol are much
Table 2: Fiscal Subsidy Burden and Under-recoveries
(Rs crore) fact that the taxes, that are domestically lower than those in India.
2006-07 2007-08 2008-09 imposed, must reflect the purchasing
Fiscal subsidies centre power parity (PPP) of the host country. Other Fallacies
PDS kerosene 970 978 974
Table 4 compares current prices across The Parikh Committee report talks of
LPG 1,554 1,663 1,714
some countries using PPP for correctly limiting LPG subsidies to below the poverty
Sub total 2,524 2,641 2,688
Under-recoveries
assessing the tax component. It is pointed line (BPL) households. How many BPL
PDS kerosene 17,883 19,102 28,225 out that the quality of Indian petrol and households do use LPG? In any event are all
LPG 10,701 15,523 17,600 diesel is well below the quality of these above the poverty line (APL) families so pros-
Sub total 28,584 34,625 45,825 products in the countries listed but no perous that they can do without subsidies?
Under-recovery on diesel 18,776 35,166 52,286 correction is made for this. It is clear that The report talks of compensating higher
Under-recovery on petrol 2,027 7,332 5,181 Indian consumers are paying the highest diesel prices for the agriculture sector
Total subsidy and
price for lower quality petrol and more for through higher support prices. What about
under-recoveries 51,911 79,764 1,05,980
Source: Petroleum Planning and Analysis Cell. lower quality diesel when compared to the the small and marginal farmers who have
US and Japan – the two most vociferous no surplus to sell? Has the Parikh Commit-
It is also important to understand how the proponents of removing fuel subsidies. tee not heard of farmer suicides even in
subsidies and the claimed under-recoveries Also, Japan and the UK and, indeed, several Punjab – the granary of India? The report
are funded (Table 3). The public sector oil other countries tax diesel at a lower rate. talks of electrification of BPL households
Economic & Political Weekly EPW march 27, 2010 vol xlv no 13 57
BUDGET 2010
when the truth is that about 44% of the
country’s population has no electricity. So
till we can learn to target subsidies and
ensure access, we will need to be more
innovative than simply removing/reducing
subsidies as suggested by the committee.
While arguing that diesel engines are
more energy efficient, the Parikh Committee
suggests a flat Rs 85,000 excise on all
diesel cars. First, a uniform tax makes no
sense as some of the smaller diesel vehicles
give twice as much mileage as the sport
utility vehicles. Further, this proposal
overlooks the fact that diesel vehicles are
already priced up to Rs 1,00,000 more than
the petrol versions of the same vehicles by
car manufacturers. The higher up-front
cost of diesel cars almost completely negates
the benefit of a lower diesel price for a
typical small domestic car that runs about
8,000 kilometres in a year.
Impact of Freeing the
Domestic Market
India is dependent on imported crude oil
to the extent of 80% even to meet domes-
tic needs. Yet, India has promoted surplus
58
refining capacity that exceeds domestic
demand by some 35%. The report admits
that value addition in refining is minimal
with raw material (imported crude oil)
accounting for over 90% of the product
price. The surplus refining capacity was
created on the back of multiple subsidies
disbursed selectively. The surplus refining
capacity was justified on the pretext of
promoting export-oriented refineries. And
indeed petroleum products have emerged
as India’s largest export in recent years.
What, may I ask, is India’s marginal
advantage in refining imported crude – an
activity known for yielding small, and
sometimes, negative margins? What we
have been exporting is not added value
but the subsidies to the refiners funded by
Indian taxpayers.
The report talks of taxing pre new
exploration licensing policy (NELP) con-
cessions and taxes on windfall profits
of the Oil and Natural Gas Corporation
(ONGC). First, ONGC is already shoulder-
ing a major share of the claimed under-
recoveries and, second, why not also tax
the oil product exporters with windfall
march 27, 2010
profits derived from exporting subsidies
they received from Indian taxpayers.
The Parikh Committee further rewards
the export-oriented refineries that earlier
received benefits for export-oriented
units in special economic zones, by allow-
ing them freedom to sell in the domestic
market, on terms identical to public
sector refineries, in the name of a level
playing field.
The public sector capacities were not
created on a level playing field when com-
pared with the export-oriented refiners.
And while going forward a level playing
field is desirable; creating such a level
ground requires a far more elaborate
exercise over time, if one is to avoid a
situation where the public sector refi-
neries lose market share and are forced to
run at less than capacity. One possibility
could be to rationalise product mix,
defer new refinery capacities, and allow
full competition only when domestic
demand catches up with the surplus
capacity already in place. If the process is
not managed, the public sector refineries
will be unable to compete with the more
vol xlv no 13 EPW Economic & Political Weekly

efficient and strategically located private,
export-oriented refineries.
How Was the IEP 2006 Different?
First and foremost, the IEP 2006 recognised
the issue of universal access to modern
commercial energy as being critical to
India’s energy security. As such, the IEP
2006 recommended that each household
be entitled to lifeline levels of commercial
energy (defined as 30 kWh of electricity
and 6 kg of cooking gas per household
per month). The IEP 2006 demonstrated
that even if this entitlement was made
encashable, the burden would be of the
same order as the reported level of sub-
sidies on these accounts. Second, the IEP
2006 recognised the fallacy of import
parity pricing and the way it was being
computed and used in claiming under-
recoveries. The IEP 2006 recommended
trade parity pricing that would have
ensured that all products with net exports
be priced no more than the FOB realisa-
tion on such exports. Finally, the IEP 2006
recognised that India’s energy sector in
general and the petroleum sector in par-
ticular was not ready for open market op-
eration. The role of adjusting taxes to
manage consumer prices was specifically
highlighted for the petroleum sector. As a
first step IEP 2006 recommended full
price competition at refinery gate and
retail outlets among the refineries meet-
ing domestic demand. Such competition
within the cap of the prices determined
by the government would have forced
these refineries to rationalise product mix
and become more efficient in order to
preserve market shares. That recommen-
dation, if implemented, together with the
recommendation on trade parity pricing
would have enforced a far stricter disci-
pline of financial justification for creating
surplus refining capacities and their loca-
tion. The market for the four products
under consideration could be thrown
open to full competition once a healthy
demand-supply balance and the desired
product rationalisation was achieved.
Budget 2010 Proposals
It is pointed out that the 2010 Budget
merely reinstates duties and excise at
levels that prevailed before the unprece-
dented spike in crude prices in the second
Economic & Political Weekly EPW march 27, 2010
and third quarters of 2008 and the ensu-
ing price volatility. What is strange is that
this is being done when crude prices appear
to be firming around the average levels
achieved in 2008-09 and the country is
experiencing strong inflation. The finance
minister has rightly emphasised the need
to bolster government revenues. Revenues
from the petroleum sector rose consistently
prior to 2008-09. In 2008-09 the centre’s
tax collection from the petroleum sector
provisionally dropped by Rs 7,344 crore.
Petroleum product prices comprise cen-
tral and state taxes and levies and the price
of the underlying commodity. The impact
on the consumer and inflation is blind to
which component of the price is increased.
Even the finance minister has admitted
that inflation will increase further as a re-
sult of his proposals for the petroleum sec-
tor. Higher taxation does not address the
issue of under-recoveries and actually
compounds the cash crunch that public
sector refineries face as a consequence. It is
possible that the intention is to raise prices
of the underlying commodities in line with
the Parikh Committee’s recommendations
after the budget is approved!
My own sense of the budget is that it
would not be prudent to give up any revenue
source without cutting an equal amount
from one or more programmes included in
the budget. If a reduction in expenditure
is not an option, the government should
explore how it can raise the same amount
of revenue more equitably by raising the
burden on the top 2-5% of Indians who
have the capacity to absorb the higher
levy. This will spare the aam aadmi who is
already reeling under the impact of high
inflation. I also believe that the petroleum
sector in India needs tax rationalisation
and not tax increases. The high incidence
of taxes on the petroleum sector, relative
to our GDP, has a negative impact on issues
such as access to energy services and de-
velopment. China, for example, has tradi-
tionally priced energy below the prices
prevailing in India.
Summing Up
In light of the facts stated above, the
Parikh Committee’s recommendations are
bad for the country and worse for the aam
aadmi. Bad for the country because the
recommendations do not address the
vol xlv no 13
BUDGET 2010
problems of petroleum pricing in their
entirety and appear to be driven by the
desire to allow private sector refiners,
originally set up for export of products,
an entry into the domestic market under
the garb of liberalising price of petrol
and diesel. This would be detrimental to
the public sector refiners in the current
context. While I am an ardent supporter of
well functioning competitive markets, I do
not believe the Indian energy or petroleum
sector can deliver such markets today.
Such markets require that demand (includ-
ing unmet demand) and supply be deli-
cately balanced. Price reforms cannot and
should not be implemented in a piecemeal
manner without addressing all the under-
lying distortions that plague the oil sector.
The Parikh Committee recommenda-
tions are worse for the aam aadmi because
inclusive development shall remain a pipe
dream without ensuring access to lifeline
levels of modern commercial energy for
all. Barring public distribution system
(PDS) kerosene, the rest of the petroleum
products are currently priced outside the
reach of the bottom two-thirds of Indians
and the report of the committee talks of
further inflationary price increases. Access
to modern commercial energy in India is
one of the lowest in the world and worse
than in some sub-Saharan countries.
Everyone among the bottom two-thirds
of India does not have access and/or the
capacity to pay for even the PDS kerosene.
And even if one assumes that the top one-
third does not consume any PDS kerosene
(a completely incorrect assumption con-
sidering the amount of leakage and adul-
teration) the per capita allotment of PDS
kerosene to the bottom two-thirds of the
population is a little over one litre a
month. But even this abject subsistence
level of allotment (actual consumption is
much lower) is not spared.
The Parikh Committee report on
pricing petroleum products should be re-
jected outright or, in the very least, de-
bated openly with all political parties and
civil society at large. The IEP, that Kirit
Parikh also chaired not so long ago,
made much more meaningful recommen-
dations on the pricing of petroleum prod-
ucts. The latest Parikh Committee does
not propose “bold” reforms – it proposes
bad reforms.
59